Individual investors who register can access daily blog posts, latest videos, podcasts and snapshots, and stay current with industry insights. On top of that, Financial Professionals get additional access to the tools, technology, resources and support they need to take the business to the next level.

1. My Profile >2. Additional Information

Account Type Financial ProfessionalIndividual Investor

By registering as financial professional, you will be allowed access to professional materials, which are specifically intended for financial advisors, registered representatives of licensed security firms, financial planners and other financial and investment professionals. By clicking ‘register’ you certify that you are a financial professional with the requisite knowledge and experience to use this material appropriately.

By submitting below you certify that you have read and agree to our privacy policy.

India’s equity market performance has been remarkable over the past year—20.7%1. Emerging markets were basically flat over this period, and U.S. equities were up about 12.7%2.
In short, India was one of the best performing equity markets in the world.
With Remarkable Performance May Come ValuationRisk
A greater than 20% return in an environment where broader emerging market equities were flat leads to a critical question: Are India’s equities becoming expensive? One way to look at this is through the change in price-to-earnings (P/E) ratio over this period3 :
• Rising Multiple: The MSCI India Index saw its P/E ratio go from 17.5x to 20.1x over this period, an increase of approximately 15%.
• Lower P/E Tilts: The WisdomTree India Earnings Fund (EPI) saw its P/E ratio go from 11.9x to 14.6x over this same period, an increase of approximately 22%.
A Rally Driven by Multiple Expansion
Over this period, the biggest factors contributing to the performance of India’s equities were related to expectations of a more positive future—with the transition to Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) government front and center. It is not surprising that multiple expansion rather than earnings growth drove the story—earnings growth has yet to respond to this initial excitement as strongly as the initial price appreciation.
But how is it that EPI’s P/E ratio started about 30% lower than that of the MSCI India Index and—even with greater multiple expansion on a percentage basis—remained about 30% lower at the end of the period?
This is really the crucial question because we know that the nature of the rally in India’s equities has led to the chance of an increased risk of India’s equities becoming expensive.
The Answer
There are two core components within the methodology of the WisdomTree India Earnings Index (which EPI tracks after costs, fees and expenses) that we believe drive the results that we have seen:
1) Annually Rebalancing Back to a Measure of Relative Value: Instead of continuing to own stocks in greater proportions due to increasing market capitalization—which can certainly relate to rising share prices—the road to greater weight within the WisdomTree India Earnings Index is paved through increasing profits. Firms that increase in share price but do not increase their earnings would typically see reductions in weight at the annual rebalance.
2) Weighting Profitable Companies by Their Profits: As of March 31, 2015, the WisdomTree India Earnings Index had 282 constituents. At the annual rebalance, each of these firms had to prove its capability to generate positive profits over the fiscal year leading up to August 31, 2014—the index screening date. Positive profits must be maintained in order to remain within the Index at the next rebalance, and the biggest profit generators receive the biggest weights.
Below, we examine how these two components of the methodology influence the distribution of constituents by P/E ratio for both the WisdomTree India Earnings Index, and EPI. The market capitalization-weighted benchmark for both EPI and the WisdomTree India Earnings Index is the MSCI India Index, which we also include for reference.
The Result: Tilting Greater Exposure to Lower P/E Stocks
• Approximately Two-Thirds of EPI’s Weight Is in Stocks Below the Median P/E Ratio of the MSCI India Index: The median P/E ratio of the MSCI India Index is 21.38x. As EPI tracks the return of its underlying Index, it is apparent that it is positioned more heavily in less expensive corners of India’s equity market. The P/E ratio distribution of the MSCI India Index is VERY different with more than 50% of its weight in stocks with P/E ratios above this same median value.4
• Approximately One Quarter the Exposure to Companies with Negative Earnings: We think this is remarkable, in that EPI had 233 holdings as of March 31, 2015, and the MSCI India Index had 65 constituents as of this same date. It may be surprising to learn that an investor can venture into exposure to small cap companies without necessarily needing to sacrifice exposure to those firms that are generating profits.5The Importance of Managing Valuation Risk in India’s Equities
There are a lot of reasons for excitement surrounding India, and there is little question that the market has great potential. However, we always find it important to remind people that managing valuation risk is one of the single most important things to do in any equity market. We believe that EPI is a tool designed with that potential in mind.
1Refers to the performance of the MSCI India Index from 3/31/2014 to 3/31/2015, sourced from Bloomberg.
2Refers to the performance of the MSCI Emerging Markets Index and S&P 500 Index from 3/31/2014 to 3/31/2015, sourced from Bloomberg.
3Source for bullets: Bloomberg. P/E ratios measured on percentage change basis from 3/31/2014 to 3/31/2015.
4Source for bullet: Bloomberg, with data as of 3/31/2015.
5Source for bullet: Bloomberg, with data as of 3/31/2015.

High double-digit returns were achieved primarily during favorable market conditions. Investors should not expect that such favorable returns can be consistently achieved. A Fund’s performance, especially for very short time periods, should not be the sole factor in making your investment decision. There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. This Fund focuses its investments in India, thereby increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in emerging, offshore or frontier markets such as India are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Investments in smaller companies increase their vulnerability to any single economic or regulatory development. As this Fund has a high concentration in some sectors, the Fund can be adversely affected by changes in those sectors. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

FOLLOW US

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473), or click here to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing, including the possible loss of principal. Past performance does not guarantee future results.

You cannot invest directly in an index.

Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see prospectus for discussion of risks.

WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.

RESTRICTED CONTENT

This content is intended for Financial Professionals only. Financial Professionals who register get exclusive access to WisdomTree Advisor Solutions.